Accounting mistakes can cause great damage to a small business, such as yours, and totter it to its foundation. Sadly, accounting errors and fails are rather common, particularly in newly founded companies.
In this article, we have gathered 5 of the most common accounting mistakes characterising small businesses based on data given to us by some of the most famous and reliable accounting agencies, coupled with some hints on how to avoid them.
Mistake number 1: not keeping track of the receivables
What a thrill when getting paid, don’t you agree? Still, keeping track of the receivables isn’t always so exciting and often causes trouble to small business owners.
Every time you make out an invoice, a receivable is recorded, i. e. a certain amount of money that must be paid by the customer. Every time you receive a payment from a customer, you should immediately register the corresponding invoice as “paid”. Unfortunately, many businessmen forget this simple process and, as a result, customer deposits are reconciled much later, usually behind the pretext of a constantly heavy schedule.
Upon tax time you are engulfed by a pile of payments deposited in your revenue account and a corresponding receivables report that just doesn’t make sense. What’s the probable outcome? Days or at least hours spent in reviewing and registering receivables, overpaying on your taxes and multiple debts. So make it a habit to stay on top of your receivables and register their payments every single month. It will save you time, much effort and a lot of money.
Do you find the whole process boring and seek a way to avoid the manual marking of your business’s invoices as paid? Why don’t you try using accounting software and ask your clients to pay you via the internet, thus automating the whole process of registering receivables, receiving your payments much faster and reliably and minimizing your work load.
Mistake number 2: throwing away expense receipts
That is a tragic mistake. Several businessmen throw away many copies of their expense receipts. Subsequently, they face lots of taxation, accounting, and cash flow issues. What about you? Have you ever found yourself checking your bank account statement and not having the least idea where certain withdrawals went? Equipment, supplies, fines, raw materials, payments, or personal expenses that were by mistake paid via your business card? Without the actual receipt which offers valuable information regarding each transaction, you can easily mistake your tax expenses report and get in return a high tax bill and possibly some sort of a fine.
How can you clear up this mess? Keep all vouchers for every single business transaction. It may seem kind of burdensome, but we will make it easier for you and much quicker. Just adopt the following suggestions:
- make use of your business card only for squaring up business expenses;
- use a certain envelope of distinctive colour to collect the vouchers and have it always with you while at work – in your briefcase, office or car. Thus you will avoid the bad habit of tucking them away into different drawers, pockets, closets or, even worse, into the bin.
- choose a certain day of the week, preferably Saturday, or a certain day of the moth, preferably the last or the first one, to check all vouchers in the envelope and register them into your tax archives or, even better, scan them and save them in the cloud;
- best of all, add all expenses during the day. FreshBooks provides a rather handy feature which can help you add your expenses and attach digital voucher copies, wherever you are, whatever you may do.
Mistake number 3: not registering cash expenses
As we mentioned earlier, it is essential for businessmen to keep up with all expenses pertaining to their business activities, if they wish these expenses to be subtracted from total revenue when the time comes. That habit also helps them have a clearer view of their business’s actual annual profits. But there lies a small… problem.
Transactions through credit cards, debit cards and checks directly linked to your professional bank account are effortlessly linked into FreshBooks or other similar features. But what about payments in cash? It is quite easy to neglect expenses paid in cash. Quite often, several cash paid expenses are never registered and are quickly forgotten. That forces the entrepreneur to repeatedly overstate income!
Don’t let yourself fall into this obvious pitfall. Find a way to record all cash payments. Don’t forget to ask always for a receipt and then link it into FreshBooks, either the very moment you get it or immediately after returning to your office.
Mistake number 4: trying to substitute your professional accountant with an amateur
Small business owners frequently think it’s a great idea to save money by tending to their own tax affairs just by themselves. In fact, hiring a skilled accountant can eventually save you much more money. For example, you may not get all possible deductions, or you might underpay your tax bills – something that will inevitably lead to fines and additional tax problems.
By hiring a skilled accountant you ensure constant help and guidance from an expert who knows exactly what to do and always implements the best possible tactics in accord with your financial condition. Professional accountants remain constantly updated on the fickle tax laws and help you prepare for possible tax hikes.
Hiring a professional bookkeeper will also minimize your accountant fees, because they will undertake and do all the preparatory work. In addition, having another pair of eyes is always clever, particularly regarding taxation and expenses. Often, small business’s success lies on the accurateness and orderliness of your financial documents.
Mistake number 5: failing to communicate properly with your accountant
Have you ever found yourself sitting in your accountant’s office while he “explains” your business’s financial condition in gobbledygook, using terms and expressions such as
- D & A,
- cash realisable value,
- loss carry forwards,
- tax liability, etc?
It’s often the misfortune of several entrepreneurs. The problem is not that your accountant knows his field and wants to prove it by using jargon and buzzwords. That seldom poses a problem. The problem in fact is that the majority of small business owners are too timid to ask their accountants to speak in a tongue that Homo sapiens can actually understand.
You don’t have to know all this “rubbish”. You pay your accountant so that you won’t have to learn them. And you also pay him in order to try and find a way to explain them to you in terms and expressions you can grasp.
We hope you found our hints and suggestions intriguing and, above all, practical. Avoid as much as you can these 5 common accounting mistakes and you won’t regret it.
About the author:
Chris Adam is content writer at Global Serve Consultants, a leading organisation specialising in international tax advice and planning, company formation and management.